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Buzz abounds on Google IPO

June 2003

Buzz abounds on Google IPO

Could this search company be worth $10 billion?

By Steve Gelsi & Bambi Francisco,

Last Update: 7:18 PM ET June 13, 2003

MOUNTAIN VIEW, Calif. (CBS.MW) -- Maybe it's the lava lights in Google's lobby, or the cafeteria that dishes out free lunches to its ever-growing roster of employees. Maybe it's the increasing use of its name as a verb to look for stuff on the Web.

Whatever the reason, Internet search giant Google is making it feel like 1999 all over again as it graces the cover of Forbes with the headline "Silicon Valley's Hottest Company" and as public demand for Internet companies sends shares of rival Yahoo (YHOO:newschartprofile) up nearly 100 percent just since January.

With Internet stocks and initial public offerings in revival mode after a three-year bear market, bankers want more than ever to host an IPO party with Google as the guest of honor.

"The largest half-dozen investment banking firms have seen their underwriting business shrink to near zero after being a huge money maker for them, and they are starving for a meaningful IPO," said Ken Marlin, of New York investment banking advisory firm Marlin & Associates. "They are all over Google like vultures right now."

Estimates on what the company would be worth after an IPO, ranging from $5 billion to more than $10 billion, are as varied as the guesses on Wall Street about when and if a deal could happen. For its part, Google is staying coy.

"Our response remains the same. No immediate plans," said David Krane, Google's chief spokesman. The company declined to comment further for this story. Join "Google" discussion.

From zero to billions

The rich valuation estimates come less than five years after two Stanford University computer science graduate students, Larry Page and Sergey Brin, kicked off the company in 1998.

By 1999, Google was crawling through tens of millions of pages with an English-language search product.

It was in that year that Google, burning through the $100,000 check it got from Sun Microsystems co-founder Andreas Bechtolsheim, took in $25 million in funding from a group led by Sequoia Capital and Kleiner Perkins Caufield & Byers.

The money raising stopped there. Unlike the early search pioneers that went public in 1996, like Yahoo, Lycos (now Terra-Lycos) and Excite (merged with AtHome and now bankrupt), Google had less capital to work with and perhaps less temptation to stray away from its core business.

It has become the world's most popular search engine, with an audience that draws on its search engine some 200 million times a day. Its search technology crawls 3 billion pages and is queried in 88 languages.

While other search engines morphed into portals, Google relied on revenue from advertisers and partners to create a cash-generating marketing machine.

Now, as the Nasdaq rallies to new 52-week highs and the IPO market shows signs of life with deals such as the FormFactor (FORMnewschartprofile) IPO this past week (see full story), the speculation surrounding Google is cranking up.

What a deal would look like

The company that's named after the number googol -- 1 with 100 zeros after it -- appears to have generated nearly that number of inquiries from deal-starved bankers.

"People know they're considering an IPO. The question is where they are in the process," said Joe Hammer, head of capital markets at Adams, Harkness & Hill.

Revenue is expected to hit $700 million to $1 billion in 2003 from advertising and search services, according to an estimate from U.S. Bancorp Piper Jaffray analyst Safa Raschtchy. That's up from an estimated $300 million in 2002 and $100 million in 2001. A large portion of that business comes from AOL Time Warner (AOLnewschartprofile), Google's first major distribution partner.

Because it's private, Google doesn't give out specific financial information. But it says it's been profitable for several quarters. The fact that Google doesn't need cash makes it even more attractive as an IPO.

Analysts and observers say they'd value Google at about halfway between the level of roughly 13 times 2003 sales now assigned to Yahoo (YHOOnewschartprofile) and 1 times sales assigned to rival Overture (OVERnewschartprofile).

That means a market cap of about $5.5 billion. See Net Sense on Google IPO valuation.

Assuming it offers 10 percent of the company at a bit of a discount to that value, Google could raise $400 million or more in an IPO, which would generate roughly $17 million in commissions. See "What Would Google Do With IPO Cash?"

IPOs in the post-reform era

John Fitzgibbon, a former investment banker who now runs the newsletter, said the likely front-runners to win the lion's share of the underwriting fee would be Goldman Sachs, CS First Boston, Merrill Lynch, Morgan Stanley, or Citigroup.

But new rules about how IPOs can be marketed and sold to investors by Wall Street investment banks could mean a Google IPO would come out far differently from the types of IPOs that popped and dropped during the tech bubble. That could be good for small investors who were largely left out of the last round of IPOs.

A Google IPO, with its high profile, would provide a litmus test for many reforms and a host of new legal hurdles for the company and its underwriters. See Net Sense.

Analysts may no longer appear in road shows for IPOs as a result of a settlement aimed at reducing conflicts of interest. Separately, there's talk about allowing individual investors access to road shows.

Under the Sarbanes-Oxley bill passed last year, companies have stricter rules on compensation, corporate governance, stock options, and sales of stock by company insiders. Once an IPO is ready to debut, underwriters no longer can award shares to clients who head up public companies in a practice known as spinning.

Also banned is the practice of laddering -- doling out IPO shares to clients on the condition that they'll buy more stock in the open market.

A panel formed by the New York Stock Exchange and National Association of Securities Dealers is looking at stock given to friends and family of companies going public and other practices. See full story.

Is it time? Is there a better option?

Once public, Google would face the pressure of quarterly profit reports, disclosure of information that may benefit competitors, and meeting corporate governance guidelines.

Some say there's no rush.

Ken Marlin of Marlin & Associates said Google might get a bigger payoff a year or two down the road if the economy picks up and the bull market comes back for sure.

The company doesn't need to generate a lot of cash right now because the business is profitable, nor does Google appear to need currency to make an acquisition because it prefers growing organically, he said.

There is also a possibility that Google would consider an acquisition offer. One Silicon Valley insider, who asked that his name not be used, said he's heard speculation that Google could be sold to Yahoo. "If Yahoo offered $2 billion for Google, it would be hard for the board not to take it," he said. "It's an immediate home run."

A sale of Google would provide a big return for Kleiner and Sequoia vs. the risk of an IPO and the challenge of having to sell stock when the company goes public. Yet a gamble on an IPO could have a much bigger payoff.

An IPO would expose Google's financials and the structure of its distribution deals to the world. It may be the case that disclosing too much information would put Google at a disadvantage.

For instance, it is widely known that Google has been offering favorable terms to distribution partners in order to woo them away from Overture, the pioneer and dominant provider of paid-search listings on the Web. Overture gives away 64 percent of its revenue on average across its distribution partners.

Some say Google gives away a much higher share.

"I've heard that Google is cutting distribution deals in the area of 90 percent and some with a revenue share of 100-plus percent," said Troy Perkins, of, a division of advertising agency Vocal Minds.

Google is able to give away a greater portion of revenue generated from traffic on partner sites since its home page generates a significant amount of search traffic. Google accounted for 27 percent of the 4 billion Web searches conducted in April, according to ComScore. (Editor's note: Google has a distribution deal with, the publisher of this report.)

Still cutting checks for nearly all the revenue, or more, than Google is taking in doesn't appear to be a sustainable model. At some point, Google executives will have to ask themselves, "How are we going to build our business on these kind of figures," said Perkins.

Indeed, if Google goes public, shareholders will ask the same questions about everything from business models to whether it makes sense to give free lunches to its hundreds of employees.

Steve Gelsi is a reporter for in New York.
Bambi Francisco is Internet editor of, based in San Francisco.

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